From CIBC FirstCaribbean

Caribbean Economic Overview

Summary: Sustained growth in advanced economies and lower oil prices provided a boon to Caribbean economic growth in 2015. However, since then, global oil prices bottomed and economic growth in the USA and UK slowed in Q1 2016. US output expanded 0.5% q/q during Q1 versus 1.4% q/q in Q4 2015, while UK growth slowed from 0.6% q/q to 0.4% q/q over the same period. Meanwhile, the average price of crude oil bottomed during the first two months of 2016 and rose approximately 11.5% ytd as at April 2016. Tourist arrivals and crude oil prices remain at levels sufficient to generate significant fx savings for commodity-importing Caribbean nations, but growth in international reserves has slowed.

Official statistics suggest that most markets recorded economic growth during 2015. Stay-over tourist arrivals expanded in all markets we cover during the year (up 4.9%)—the first time in recent history—but at a slower pace than in 2014 (5.5%). Arrivals growth slowed in ten of sixteen markets, including the two largest markets of Jamaica and the Bahamas. Moreover, economic expansion has become more reliant on the ongoing recovery in tourism in some economies as a combination of public expenditure restraint and delays in private investment restricted growth in construction value-added in half of sixteen markets. Nonetheless, unemployment, while high, continues to trend downward, with only a marginal increase recorded in Trinidad and Tobago. Since then, except for Barbados, where strong growth in tourism and modest improvements in construction and wholesale and retail trade lifted economic growth to 1.7% y/y during Q1 2016, preliminary data suggest further deceleration in economic growth. The effects of depressed oil and gas prices and lower energy production have driven both energy and nonenergy output lower in Trinidad and Tobago in Q1 2016, while growth in tourism slowed in Aruba, the Bahamas, Cayman Islands, and Jamaica over the same period.

Caribbean Market Review

Summary: Caribbean sovereign bond yields contracted on better market sentiment and lower anxiety over the US Fed. Still, spreads continued to widen, following the same pattern as the overall credit market, especially emerging market credits. And unlike in Q1 2016, the market did not make a differentiation between investment grade credits and high yield. It did, however, differentiate between countries. JAMAN and DOMREP were the clear outperformers, having cheapened up early in 2016 on supply and Fed fears. COSTAR also performed well with progress made on tax reform in congress. Some investment grade also performed well, most significantly BERMUD. With the return of growth and improvement on the fiscal front, BERMUD outperformed peers such as BAHAMA, PANAMA, and TRITOB, but also high yield credits such as BARBAD. Growth has spread to the whole region with the laggards Barbados and Bermuda finally showing real improvement in economic activity. Lower energy prices figure centrally in this improvement. Fiscal improvement, however, is starting to become significant, as primary fiscal balances have swung into surplus. Fully 11 of the 16 countries we cover are currently posting or are poised to post (Bermuda) primary fiscal surpluses. That is a significant advance from just three years ago. Consequently, we remain constructive on Caribbean bonds. Continued fiscal adjustment and consolidation of the recent fiscal improvement should help spread compression even in an environment of US Fed normalization. Jamaica and the Dominican Republic continue to consolidate strong fiscal gains. The new Jamaican JLP government shows no sign of changing course and the re-election of Danilo Medina in the Dominican Republic bodes well for reform. Barbados is growing, but an easing of fiscal policy and a downgrade by Moody’s to Caa1 caused the bonds to cheapen. Some of the fiscal weakening is more of a timing issue on some receipts and does not represent a surrender of austerity in the medium term. We think that the government of Barbados will return to more fiscal adjustment. Hence, we continue to like holding Barbados bonds, especially BARBAD 7 1/4 12/15/21. The Bahamas put in decent growth numbers but show some signs of slowing earlier in 2016. The Chapter 11 bankruptcy of the Baha Mar resort project continues to haunt the country. Still, we think that the rating agencies and the market are putting too much emphasis on this project and Bahamas is cheap, especially the BAHAMA 5 ¾ 01/16/24. Jamaica continues to outperform and the new government shows no signs of deviating from the IMF program. Although the market has probably over discounted Jamaica’s improvement and have taken profits, we would recommend the JAMAN 6 3/4 04/28/28 for those interested. On the other hand, we think that DOMREP is not yet expensive to fundamentals, and like DOMREP 6 7/8 1/29/26. Despite BERMUD’s good performance, we still like BERMUD 4.854 02/06/24. With the continued acceleration in economic and momentum on discussing expenditure cuts and progress on both the value-added tax (VAT) and Income Tax bills in congress, we still like COSTAR 4 ¼ 0/26/23.

SOURCE: www.cibcfcib.com